California Desert Blooms With Office and Retail

A bidding war for a 30-acre parcel of commercial land in the city of Ontario reveals much about development pressures in the vast region of Southern California known as the Inland Empire. Zoned for commercial use, the parcel attracted at least nine potential buyers. In the end, the land went for an estimated $20 million — slightly above the asking price — to a buyer so eager to close the deal that it brushed aside standard due-diligence requirements.

News of a bidding war for dirt may be surprising in a region famed for its seemingly infinite horizons of open land. Yet, Riverside and San Bernardino counties, which together market themselves as the Inland Empire, are rapidly evolving into Southern California's latest suburban business center. Developers are busy elbowing each other to build Class-A office buildings, lifestyle centers, residential mixed-use projects and full-service hotels.

“The Inland Empire is now becoming a substantial base of office space for corporate America, as opposed to just being a labor pool for other communities,” says Jeff Phelan, a partner in Panattoni Development Co.

The Inland Empire is the fastest growing region in California in population, and its economy also is sprinting forward. While that economy is diversifying, international trade remains — and will likely remain — a primary engine: In 2003, the Inland Empire handled 1.28 million containers, or about one-third of what entered the ports of Los Angeles and Long Beach that year, according to local economist John Husing.

Economic growth is attracting developers. In an area formerly dominated by local builders, national names are now emblazoned on construction fences. Middle-class amenities also are popping up in the Inland Empire like wildflowers after a desert rain. In the affluent suburb of Rancho Cucamonga — mostly farmland only a few decades ago — the 100-acre Victoria Gardens, a lifestyle center resembling a historic downtown area, opened earlier this year. The developer is Forest City.

Mixed-use extravaganzas

In Ontario, another project with an urban flavor is Piemonte, a 1 million sq. ft. mixed-use extravaganza by Panattoni. The project is a combination of office space, Main Street retail, a lifestyle center and a 236-room hotel. Separately, J.H. Snyder of Los Angeles is negotiating with the city to build a 12-block housing-and-retail project surrounding Ontario City Hall, including 750 houses, both for-sale and rental.

Yet another large-scale, mixed-use project is the 60-acre venture of Watt/Genton and AIG Global Real Estate Investment. The two entities have joined forces to build 350,000 sq. ft. of retail and office space, in addition to 300 multifamily units and 275 single-family homes as part of a larger residential subdivision known as the New Model Colony.

And with industrial land becoming scarce in the populous western end of the Empire — the area that includes the cities of Ontario and Rancho Cucamonga — institutional investors are now competing to buy industrial or flex buildings.

In two recent transactions, Panattoni sold a 450,000 sq. ft. industrial building to Teachers Insurance and Annuity Association (TIAA-CREF), while United States Automobile Association (USAA) recently sold a 980,000 sq. ft. building to CB Richard Ellis Investors.

Scarcity and rising rents

“Institutions have a huge appetite” for these sorts of buildings, according to CB Richard Ellis broker Daria Longo, who adds that investors will “buy whatever they can lay their hands on.”

Land prices reflect the demand. For the best locations in Ontario and Rancho Cucamonga, “the price of land has literally doubled in one's year's time,” says Carol Plowman, a broker in Lee & Associates' Ontario office.

Commercial land in the western Inland Empire is going for $13.50 to $15 per sq. ft., and sometimes more. In the less developed eastern side of the “empire,” in contrast, prices run from $7 to $13.

Urban evolution, California-style

The Inland Empire has reached a tipping point between being a bedroom community and a self-contained, “full-service” community. Michael Beck, deputy city manager of Riverside, sees a correlation between the growth of the region and that of Orange County 20 years ago. “In the early 1980s, Orange County was clearly a bedroom to L.A.,” he says. The county grew very rapidly and underwent what Beck calls “a natural maturing process,” with abundant retail and office construction catering to a well-educated workforce.

“As the economy matures, the different cities of the Inland Empire — Riverside, Corona and Ontario — are now converting to a knowledge-based economy, with more office professionals, including technology, high-tech and business development,” says Beck.

The two-county region is expected to grow by 1.8 million people by 2020, according to local economist Husing. That population increase would be greater than the population growth of 47 of the 50 individual states, he adds.

Housing is the growth engine

Affordable housing is driving much of the growth in the two-county region, which is expected to expand by 1.8 million people by 2020, an increase greater than in 47 of the 50 states, according to Husing.

Last year, homebuilders in the Inland Empire started 40,000 new housing units in the region, compared to 188,000 new housing units being produced statewide, according to the Sacramento Regional Research Institute. The median home price in San Bernardino County was $344,000, compared to $456,000 in California statewide, according to Dataquick Information Services.

Homebuilders have responded to the influx of well-heeled executives by building the kinds of large, expensive homes in a region that formerly had little more to offer than small starter homes. It is now a housing market for all income levels. The Inland Empire also is drawing first-time homebuyers with home prices of approximately $200,000. “We have $1 million tract houses right now, and the average new home price is $585,000,” says Beck.

Office next great wave

Office space is arguably the development product of the moment. Traditionally, Inland Empire cities had very small inventories of office space mostly in suburban, garden-style buildings. The growth of white-collar employment, however, has attracted office construction. “Office is coming into its own,” says Longo, the CB Richard Ellis broker. “The retail market is already there, multifamily is there, and now the Class-A office market will be the next great wave of activity.”

As home to the Los Angeles-Ontario International Airport, Ontario has long been the focus of industrial and freight-related development. Now the city is experiencing a genuine office boom, with 2.3 million sq. ft., a 74% boost in the city's inventory, either under construction or planned, according to CB Richard Ellis.

The largest single project to date is Ontario Airport Towers, a 500,000 sq. ft. complex being built by a venture of PGP Partners Inc., a Lake Forest, Calif.-based developer and RREEF Funds, the San Francisco-based pension fund advisor.

In Riverside, developers are building, or plan to build, 2 million sq. ft., a 40% increase in the city's office-space inventory. Turner Development is building the third phase of the Riverwalk business park in Riverside. The 1 million sq. ft. mixed-use project will eventually contain 500,000 sq. ft. of office space, along with retail and a hotel. The first two phases consisted of 29 freestanding buildings targeting the owner-occupied market.

Although the developer expected most of the units to sell to industrial users, nearly all sold to office users. “Some buyers owned their own buildings in Orange County for years, and, after seeing what they could sell their buildings for, pocketed the profit and moved their business,” says Michael Kendall, vice president of Turner Development.

Rising rents, thin vacancies

While new construction often makes vacancy rates balloon, Inland Empire office buildings are filling up, not thinning out, at the moment. Regional office vacancies were a lean 10.28% in the second quarter of this year, compared with 10.92% a year earlier, according to CB Richard Ellis.

Monthly rents rose to $1.74 from $1.64 per sq. ft. The city of Corona, which is located near the Orange County border, reported effective rents as high as $2.40.

Despite the rapid expansion of the white-collar labor force, the region remains heavily dependent on international trade stemming from the ports of Long Beach, Los Angeles and Los Angeles International Airport (LAX). In the past 10 years, industrial developers have built about 368 million sq. ft. of industrial space, most of it freight-related, or something roughly equivalent to 18,000 acres under roof, to accommodate the endless stream of cargo containers.

Trade will continue to spark development at the Ontario airport, predicts Mary Jane Olhasso, the city's economic development director. “There's no doubt we will see very intense, very vertical development to handle up to 30 million passengers in 2025,” she says.

Today, much of the industrially zoned Ontario area land is fully developed. Regionally, industrial vacancies were 1.28% in the second quarter, compared to 2.38% a year earlier, according to CB Richard Ellis.

Go east, young developer

The scarcity of new warehouse and freight facility land in the western Inland Empire has created a market for cheaper space in the eastern region, especially in cities along Interstate 15. In Victorville, the conversion of the former George Air Force Base into the 8,500-acre Southern California Logistics Airport is part of an effort to market the region to the air-cargo industry.

Stirling Airports International is the private developer hired by the City of Victorville to develop 63.5 million sq. ft. at the former base. About 5 million sq. ft. has been leased to tenants such as Goodyear, ConAgra and GE Aircraft Engines. Stirling principal Dougall Agan says that recent decisions by regulators to limit the amount of air cargo coming into LAX means a potential spillover in cargo business for both Ontario and the Victorville airports.

Freight and population will continue to drive the “empire,” according to Agan. “Asia is producing the majority of goods we consume, and the majority of that is going through the West Coast,” continues Agan. “We are America's logistics hub.”